[ Post-Washington Consensus ]

Development requires more ownership

The international debate on what constitutes the right economic policy for development has become considerably more intense in recent years. Some of the recommendations that prevailed in the 1980s and ‘90s, based on neoclassical economic theory, had to be revised. Central to the economic recommendations of the ‘old’ Washington Consensus were liberalisation and deregulation of the economy as well as ‘neutral’ monetary and fiscal policies.

With the Cologne debt relief initiative (HIPC), the Washington Consensus and its structural adjustment strategy were basically relegated to the past. They were superseded by the concept of Poverty Reduction Strategy Papers (PRSPs). This approach depends on developing countries drafting policies themselves (“ownership”) with the involvement of civil society (“participation”). So far, however, the international financial institutions have neither thought the new concepts through to their conclusion nor placed them in a coherent context. Several conceptual gaps still remain.

It is still largely unclear how forces can be mobilised for growth in developing and transition countries and how their economies might be better shielded against external shocks and instability. In the light of current trends, it is feared that many countries will hardly achieve the Millennium Development Goals (MDGs) unless sustainable economic growth is attained and harnessed to reduce poverty. Despite HIPC, many affected countries – as well as Middle Income Countries (MICs) – remain hostage to debt. The point at which debt repayments for developing and emerging economies become crippling has not yet been systematically analysed.

This suggests that donors have not adequately implemented the new approaches yet. While the Bretton Woods institutions have introduced sweeping reforms – the World Bank has acknowledged the key role institutions and “governance” play in development and has replaced its purely market-based approach in favour of more practical solutions – discrepancies between vision and reality persist on the ground.


Shortcomings of the Washington Consensus

Some of the shortcomings of the old policy recommendations are well known. They ignored distribution issues, for example, paid little attention to the role of institutions, and assigned only a passive role to macroeconomic management. The neoclassical equilibrium model on which the Washington Consensus is based permits analysis of allocation aspects but does not take institutional or socio-economic structures into account. The “standard packages” of structural adjustment programmes were usually far less differentiated than the related political recommendations in general. Core elements of the programmes were swift privatisation and liberalisation of capital markets. Deregulation and liberalisation were deemed adequate requirements for optimising resource allocation and paving the way for high growth.

The BMZ sees the main failing of the Washington Consensus in the lack of significance it attached to institutions as actors in the development process. This, the BMZ says, is in striking contrast to the results of recent insights and empirical research, which indicate that policy measures have no long-term impact without institutional reform. Efficient institutions curb insecurity and thus increase readiness to invest. Long-term maintenance of dynamic growth processes is possible only where there are institutions, which help boost productivity, guarantee a high degree of stability and reduce vulnerability to external shocks.


Unconventional approaches

Such findings need to be properly thought through and translated into action. This means actively helping developing and transition countries to plot their own course. It also follows from the paradigm shift marked by HIPC/PRSP that donors should accept unconventional policy measures. “Ownership” means donor institutions should be open to alternative economic policy options, including macroeconomic options. Without diversity at concept level it will not be possible to mobilise sources of growth on the requisite scale.

The discussion paper makes a number of general conclusions relating to economic policy. They particularly concern the quality of institutions, regulatory systems and governance and the issue of property rights, which need to be seen as factors fundamental to all other forces for growth. These issues should systematically be taken into account when economic reforms are drafted. This is especially true for reforms based on liberalisation and privatisation. If necessary, liberalising action should be postponed until the minimal requirements are met in institutional and macroeconomic terms. The question of time frames for reform should also be given serious consideration and not – as is often the case – dismissed as a mere detail of “timing and sequencing”.

There is no universal recipe for development. Solutions need to be customised and country-specific. It is important that reforms should be anchored in the political, economic and cultural landscape of the developing country in question and that its financial and administrative capacities ought to be taken account of. Feasible reform needs to be given higher priority than ideology. Second-best or even third-best options are generally better than “pure doctrine” if they suit the context of the country.

More attention needs to be paid to the question of debt sustainability. Financial transfers – and especially ODA loans – need to result in more investment and higher productivity. Situations where countries amass unsustainable mountains of debt need to be prevented to reduce susceptibility to external shocks. ODA should take account of individual countries’ situations. This calls for more flexible, more adequately tailored financing instruments. For MICs, the structure of external debt is also significant: short-term volatile currency transfers are particularly problematical.


Confining conditionality

To increase long-term growth and to substantially reduce poverty, developing country ownership needs to be successively strengthened. Primary requirements are:
better use and targeted development of local analytical capacities (for instance through Poverty and Social Impact Analyses – PSIAs);
advice by external partners (especially the Bretton Woods institutions) on a wide range of policy options, including unconventional policy proposals;
no taboos concerning marcoeconomic issues; they should be included in the PRSP process; and
greater confinement of World Bank and IMF programme conditionalities to core areas.

Better safeguards should be provided against external shocks. The lending policy of multilateral and bilateral donors needs to be adjusted to suit the debt sustainability of recipient countries. In this context, it is important to (continue to) develop financing facilities, which allow swift assistance in the event of external shocks. At the same time, financing instruments need to be designed to reduce debt-servicing risks. Examples could be government bonds with interest payments tied to GDP growth or more flexible arrangements for the servicing of concessionary credits. To eliminate exchange rate risks, more ODA loans should be denominated in local currencies. The World Bank needs to strengthen its strategies for crisis prevention and, in particular, for dealing with external shocks and managing crises.

More account needs to be taken of macro/micro-level interaction. Efficient strategies for promoting economic growth and reducing poverty are possible only where macro and micro policies are functionally interwoven.

Last but not least, PRSP processes need to be improved and poverty reduction and other development strategies made more explicit. It is a well-known fact that many PRSPs do not adequately define priorities, identify trade-offs between the different goals and measures or signal the budgetary implications of the measures that are planned. In particular, they generally fail to make any mention of potential sources of future economic growth, let alone craft a strategy for mobilising them. Only when these shortcomings are eliminated can PRSPs become real planning tools.